Keshi CO 12/14 Part a Swap

Without the swap, if borrowing fixed then Keshi would have paid 5.5%
There is a benefit by swapping of 0.8%, of which Keshi gets 70% which is 0.56% less charge of 0.10% = 0.46%

Therefore Keshi must end up paying 5.5% – 0.46% = 5.04%.

But because of swapping, Keshi borrows floating and pays L + 0.4%

To make things ‘work’ the counterparty will pay L to Keshi. So now Keshi is paying L + 0.4% – L = 0.4%

Keshi has to end up paying a total of 5.04% (as above) of which 0.1% is charges – the remainder is 4.94%

So, to make things ‘work’ completely, Keshi must pay the counterparty 4.94% – 0.4% = 4.54%

You are welcome 🙂

If K borrows fixed at 5.5% and the other borrows floating at L+0.3%, then the total comes to L + 5.8%

If K borrows floating at L+0.4 and the other borrows fixed at L+4.6% then the total comes to L + 5%

So what they should do is the second option and swap i.e. pay each others interest. Between then they will save 0.8% of which K will get 70% which is 0.56% saving.

Without the swap Keshi pays fixed interest of 5.5%.
With the swap they save 0.56% and so end up paying 5.5 – 0.56 = 4.94%. In addition they have to pay 0.1% to the bank which gives a final total of 4.94 + 0.1 = 5.04%.

The free lecture on swaps will help you.